Yes, you read that right.  Opaque securities should be considered an asset class.

But isn’t the Transparency Label Initiative all about dividing the global financial system between transparency and opacity with the intent to drive most investment to where there is transparency?

Yes.  However, the absence of a label is also a useful indicator.  It tells an investor where they are blindly betting on Wall Street’s story about what an investment is worth without the ability to Trust, but Verify the story.

We know investors are comfortable blindly betting when they know they are blindly betting.  Just look at lottery ticket sales.

The Transparency Label Initiative is not going to stop investors from blindly betting.  What is does do is give them the tool so they know when they are blindly betting.

This distinction is important because like the lottery, it sets the investor’s expectation for returns.  High if the security works according to the story Wall Street tells and a complete loss if the story is untrue.

With this return expectation, an investor can chose how much, if any, exposure they want to securities in the Opacity Asset Class.

Looking at opacity as an asset class has many benefits including it allows investors to look at their portfolios along a transparency/opacity dimension.  Investors can then ask if they are being adequately compensated for their opaque investments given the risk of losing 100% of their invested principal.

Like junk bonds, the first step in adopting the “opacity asset class” is identifying what investments qualify.  This is being handled by the Transparency Label Initiative.

The second step is to look at the historical returns of the investments in this class.  Even taking out the sub-prime mortgage-backed securities that blew up so spectacularly in 2007 through 2009, the historical returns are negative.  This suggests that in the absence of being told an investment is opaque, investors are underpricing the risk.  This should end with the adoption of opacity as an asset class.